Why the People Who Make Money Forex Trading Love the BOJ
The danger in the carry trade, of course, is that you are in a leveraged short position in a currency (Yen) that historically appreciates due to the high savings rate of Japanese citizens and (as a result) their high surplus current account / trade surplus. The risk any leveraged trader faces comes when the short currency appreciates faster than their interest accumulates – thus wiping out any gains.
The beauty of the currency carry trader’s relationship with the Bank of Japan is that the BOJ WANTS a weak Yen. They WANT currency traders to come in and short the heck out of the Yen to help keep Japanese products competitive in overseas markets. When speculators aren’t shorting the Yen in enough volume, the BOJ has to come in (as they did last night) and flood the market with Yen / smashing the Yen down versus a broad spectrum of trading currencies – notably USD, AUD, NZL, and GPB. What does this overnight Yen bashing do for carry traders? It provides insurance against margin calls provided you can gauge approximately where the BOJ will say, “enough!” and intervene against Yen appreciation.
Savvy Forex Traders Saw This Coming
A number of us in the industry saw this coming. Anyone who’s been around multinational finance for any length of time knows the BOJ has limits, and when those limits are reached, they step in and don’t apologize. The Japanese economic engine (such as it is) demands a weak Yen.
Far be it for us, as carry traders, to deny them that. It’s an odd partnership between currency carry traders and the Bank of Japan – but if it’s win-win for both parties… why not drink the kool-aid?
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